Raph Engle Concepts Limited v SCL Holdings Limited [2016] NZCA 309 (6 July 2016)

Last Updated: 27 July 2016

IN THE COURT OF APPEAL OF NEW ZEALAND
CA402/2015 [2016] NZCA 309
BETWEEN	RAPH ENGLE CONCEPTS LIMITED Appellant
AND	SCL HOLDINGS LIMITED First Respondent
AND	SYSTEM CONTROLS LIMITED Second Respondent
AND	SCL DESIGN LIMITED Third Respondent
AND	SCL INDUSTRIES TECHNOLOGIES LIMITED Fourth Respondent

Hearing:	15 June 2016
Court:	Harrison, Mallon and Toogood JJ
Counsel:	R J Hollyman and A W McDonald for Appellant N R Campbell QC and A J Sinclair for Respondents
Judgment:	6 July 2016 at 10 am

JUDGMENT OF THE COURT

1. The appeal is dismissed.

2. The appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.

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REASONS OF THE COURT

(Given by Toogood J)

Introduction

[1] In a judgment dated 24 June 2015 Faire J dismissed a claim for unpaid sales commissions brought against the respondents by Raph Engle Concepts Ltd (REC).^[1] REC, a specialist in providing the intellectual property and technology for largescale refrigeration systems, had entered into terms of engagement with a limited partnership, SCL Industries Limited Partnership (SCLILP).^[2] The partnership had been formed to assist SCLILP to enter into and implement contracts for projects to design and build significant refrigeration plants utilising, in part, REC’s industry knowledge, experience and know-how.
[2] In recognition of REC’s contribution to each of the projects secured by SCLILP, SCLILP agreed to pay REC sales commission equal to 5.5 per cent of the contract value “from any payments received, when received”.^[3] SCLILP received contract payments and paid REC some of the commission due. SCLILP went into liquidation. It was common ground that, as at the date of the liquidation, REC was a creditor for commission it was entitled to receive under the terms of engagement with SCLILP but which remained unpaid.
[3] At its core, REC’s claim was based on an assertion that the contract payments received by SCLILP were impressed by a trust which required SCLILP to hold on trust for REC the portion of the payments received which represented REC’s commission. REC claimed that it would be entitled to trace the commission through to related companies of SCLILP, which are the respondents in the appeal, as knowing receivers of the funds held on trust for the benefit of REC.
[4] Faire J determined that the commission due to REC was not held on trust and that REC and SCLILP were merely creditor and debtor respectively. It followed that the obligation to pay the debt could not be traced to the present respondents. REC now appeals that decision.

The facts

[5] Mr Raph Engle, the principal of REC, is a highly experienced refrigeration engineer with an international reputation, specialising in large-scale refrigeration projects. Among his achievements is the development of the design and construction of freezers and chillers (tunnels) for meat products in packed cartons. Over time, he established a good working relationship with the managers of a group of companies known as the SCL Group, which had expertise in developing and installing operating systems.
[6] As a result of their successful association, Mr Engle and senior managers of the respondent group of companies worked closely together in the development of technology and worldwide marketing of tunnel refrigeration systems for the meat industry.

The agreement

[7] The arrangements between REC and SCLILP were confirmed in an admirably succinct and well-drafted single-page agreement entitled “Terms of Engagement” (the agreement). It was signed by Mr Engle on behalf of the plaintiff and by Mr Christian Chandler on behalf of SCLILP on 1 October 2010.
[8] The entire agreement reads as follows:

Terms of Engagement

An agreement between SCL Industries Limited Partnership and Raph Engle Concepts Limited

For the purposes of these Terms of Engagement SCL Industries Limited Partnership will be known as SCLILP and Raph Engle Concepts Limited will be known as REC.

1. REC IP

IP owned by REC specifically relating to Multipass, CF1 and CF2 technologies will be available to SCLILP, on a globally exclusive basis, (excluding Latin America, determined as USA/Mexico border south).

In the event an equal one-third shareholder option is taken up by REC, ownership of all REC above mentioned IP will be transferred to SCLILP.

In the event this engagement is terminated, SCLILP will maintain the right to use the REC IP, on a non exclusive basis for a period of 60 months from the date the engagement is concluded as long as the commission mechanisms described herein are afforded to REC.

Under no circumstances is the REC IP transferable to any third party without REC’s written consent.

2. REC Resource

SCLILP will use REC for the purpose of selling, application design, pricing and in any other way considered appropriate for the ultimate benefit of SCLILP. In return REC will be paid an agreed monthly retainer of $5,000.00+GST for a maximum period of 12 months only. During this period all out of pocket expenses directly related to the SCLILP business will also be reimbursed. In the event that REC does not take up ownership in SCLILP at the end of the 12 month period this agreement will end, and a new contract with REC will be considered.

3. PRODUCTS – Commission

All products that are ‘championed’ by REC now and those that may come to be championed by REC, such as (but not limited to) spirals and plate freezers, will be sold exclusively through SCLILP in the NZ and Australian market. This means that REC will provide SCLILP with a quotation including REC profit, SCLILP will then ‘on sell’ to the prospective Customer. This process will be done in an ‘open-book’ environment, thus ensuring pricing is kept ‘realistic’.

4. PROJECTS – Commission

For all projects secured by SCLILP that are attributable to REC by lead or prospect and/or REC IP, a commission equalling 5.5% of the total SCLILP contract value will be paid to REC by way of sales commission from any payments received, when received.

In the event that a discount is required to ‘lock-in’ a project under consideration then all participants, including SCLILP and REC and any local agent, will collectively consider reduced commission payments, (the value of which will be by negotiation) in order to secure the project.

The parties below agree that the above will form the ongoing working arrangement between REC and SCLILP.

[9] It may be seen that the broad purpose of the agreement was to enable SCLILP:

• (a) to use REC’s intellectual property, products and expertise for the purpose of selling, application design, pricing and other purposes related to SCLILP’s business; and
• (b) to make use of certain REC intellectual property in entering contracts for the design and implementation of tunnel freezer systems worldwide (excluding Latin America and South America) on a globally exclusive basis.

There was also an option for REC to purchase shares in SCLILP.

[10] It is evident from the non-prescriptive terms of cl 3 and the second paragraph of cl 4 that the parties trusted that they would be able to negotiate future arrangements, within the terms of engagement, to give effect to their common objectives.

Contracts entered into, but SCLILP fails

[11] SCLILP secured contracts for three projects involving the design and construction of refrigeration tunnels in Mexico, Venezuela and Thailand. Clause 4 of the agreement was engaged in respect of the Thailand project. While the Mexican and Venezuelan projects were excluded from the terms of the agreement, the parties negotiated a commission fee for each (8.5 per cent) and agreed otherwise the terms of the agreement were to apply. As SCLILP received progress payments under the contracts it would notify REC of the sum received, REC would invoice SCLILP for the amount of its commission (being 5.5 per cent of the payment received), and the commission would be paid.
[12] The Mexican and Venezuelan projects foundered during 2012 and SCLILP elected to stop paying all creditors save for those necessary to salvage the Mexican project. Both projects failed in the end, creating substantial losses for SCLILP, which led to its liquidation.
[13] By the time SCLILP went into liquidation, REC was owed $281,717 for commission which had not been paid by SCLILP as required under the agreement.

The High Court proceeding

[14] REC sued SCL Holdings Ltd and SCLILP in the High Court in a proceeding commenced on 13 June 2013. After SCLILP went into liquidation on 22 November 2013, the companies associated with SCL Industries Ltd were were joined as defendants. In his judgment Faire J noted that as a result of the liquidation of SCLILP the causes of action against that company were effectively stayed because of the absence of consent of the liquidator or an order of the court.^[4] The case proceeded against the related companies only.
[15] In the High Court REC argued that the first paragraph in cl 4 of the agreement created a trust in its favour over 5.5 per cent of the contract payments received by SCLILP owed to REC from time to time under any of the applicable project contracts. Mr Hollyman sought to establish that the terms of engagement created obligations on SCLILP to hold the commission owed to REC out of any contract payment on trust created by:

• (a) the proper construction of the wording of the agreement; or
• (b) SCLILP’s obligation as a fiduciary; or
• (c) an equitable assignment to REC of SCLILP’s chose in action over SCLILP’s equitable interest in the funds held by its bank following a contract payment.

[16] Faire J rejected those propositions. He held that the terms of engagement are nothing more than a simple contract for SCLILP to pay a sum of money held by it to the plaintiff at a particular time on certain conditions being fulfilled.^[5] Concluding that the terms of engagement did not support the existence of a trust, a fiduciary relationship or an equitable assignment, the Judge determined that REC and SCLILP were parties to a standard debtor/creditor relationship.^[6] Assurances that REC would be paid its commission when SCLILP received progress payments under its contracts from time to time were no more than assurances that the defendant would honour the terms of the agreement.

The applicable principles

[17] The High Court’s judgment addresses at some length REC’s arguments in support of the existence of a fiduciary relationship and the concept of an equitable assignment. Although Mr Hollyman restated them in his comprehensive written submissions on appeal, we do not think it is necessary to discuss them. By different routes, the alternative arguments all end up in a submission that the Court should find that the unpaid commission was subject to a trust.
[18] This is a straightforward case of contract interpretation and the applicable principles of the approach in New Zealand are well understood. A court’s task is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.^[7] The text remains centrally important and the natural and ordinary meaning of the language used will be a powerful indicator of what the parties meant.^[8]
[19] The determinative question in this case is whether the parties intended cl 4 to create an obligation on SCLILP to hold on trust for REC, out of each payment received under a project contract, 5.5 per cent of the sum received and to pay that amount to REC by way of sales commission.

Discussion

[20] The operative part of cl 4 is that which creates a liability for SCLILP to pay REC sales commission equalling 5.5 per cent of the total value of the project contract. That part of the clause is not in issue. The words relied upon in support of Mr Hollyman’s argument for a trust are those which qualify the liability to pay commission. Mr Hollyman focused his argument on the words “from any payments received” (emphasis added), “from” meaning “out of”. But we consider that the qualifying words at the end of the first sentence were intended to be read together: “from any payments received, when received”.
[21] Having agreed that sales commission would be paid and how much, it was necessary for the parties to add qualifying words to determine the timing of the commission payments. Without them, the agreement would have been silent on that point, leaving open three possibilities:

• (a) The commission was payable in full when the project contract was entered into.
• (b) The commission was payable in full when the project contract was completed.
• (c) The commission was payable at some other time.

[22] It is common ground that, as might have been expected for what were essentially construction contracts, the project contracts provided for progress payments. The words “from any payments received, when received” required that, rather than paying the full 5.5 per cent sales commission at the beginning of the project contract, the payment was suspended not until the end of the project but until SCLILP received “any” progress payment. At that time SCLILP would pay REC “commission equalling 5.5%” of the payment.^[9] Neither of the parties was required to assume any risk: when SCLILP received a payment, REC received a proportionate share of its commission entitlement.
[23] The practice adopted by the parties while the agreement was on foot was that SCLILP would tell REC that it had received a progress payment and the amount; REC would render an invoice to SCLILP for an amount equalling 5.5 per cent of the progress sum received; and SCLILP would then pay on the invoice. That practice reflected the plain wording of the agreement. It was a reasonable, commercially sensible arrangement between parties who trusted each other, and nothing more was needed to give effect to cl 4. There was no evidence that the representatives of SCLILP and REC who negotiated the agreement turned their minds to what should happen if SCLILP defaulted on its obligation to make commission payments; no security was provided to protect REC’s entitlement. Any additional requirement that SCLILP was to hold 5.5 per cent of each progress payment on trust for REC pending payment would have had to be expressed clearly.
[24] The terms used in the agreement make the meaning clear and it is unnecessary to go outside them to understand what the parties intended. But it is instructive that REC was not entitled to receive any payments from the party with whom SCLILP contracted; REC was not a party to the project contracts. There could be no suggestion, therefore, that any part of the progress payments was received by SCLILP on behalf of REC. SCLILP was not required to bank the amount of the commission into a separate account. We agree with Mr Campbell QC that the approaches taken by the courts in other cases cited to us by Mr Hollyman,^[10] which turn on their own facts, do not provide any assistance to REC.

Result

[25] We dismiss the appeal.
[26] The appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Metro Law, Auckland for Appellant
Kemps Weir Lawyers, Auckland for Respondents

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^[1] Raph Engle Concepts Ltd v SCL Holdings Ltd [2015] NZHC 1415.

^[2] SCL Industries Limited Partnership is registered as a limited partnership under the Limited Partnerships Act 2008, s 51.

^[3] The full terms of the agreement are set out at [8].

^[4] Raph Engle Concepts Ltd v SCL Holdings Ltd, above n 1, at [18], applying pt 16 of the Companies Act 1993 by virtue of the Limited Partnerships Act, s 92.

^[5] At [90].

^[6] At [80].

^[7] Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60], applying Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL) at 912 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14].

^[8] Firm PI Ltd v Zurich Australian Insurance Ltd, above n 7, at [63].

^[9] The words used in cl 4 of the agreement.

^[10] In re Irving (1877) 7 Ch D 419; Brice v Bannister (1878) 3 QBD 569; Attwood and Reid Ltd v Stephens [1932] NZGazLawRp 163; [1932] NZLR 1332 (SC); Westpac Banking Corporation v Savin [1985] 2 NZLR 41 (CA); West City Construction Ltd v Levin [2014] NZSC 183, [2015] 1 NZLR 362.